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The dangers of not properly documenting tenancy arrangements

This note examines the difficulties that arise where an owner of commercial property allows someone into occupation of the property without documenting the basis on which they are to occupy it. This is a common scenario in practice. Sometimes it happens because the owner does not want to incur the time or cost of negotiating a new lease, sometimes it is simply that the occupier is allowed into the property before the terms of the occupation have been finalised and sometimes it is simply that the parties have not given any thought to the nature of the occupation. Whatever the reason, undocumented tenancy arrangements can cause difficulties for both parties, especially when the owner wants to get the property back.

What legal interest has been created?

The first question to consider is what legal interest has been created by allowing the occupier into occupation. There are a number of different options but the ones that are most likely to arise in this situation are as follows:

A licence to occupy.

A tenancy at will.

A periodic tenancy.

A lease.

A licence to occupy is a personal right for the occupier to use the property and does not create an estate in land. A licensee does not have a right to exclusive possession. Therefore, if the occupier is a true licensee, the owner can simply revoke the licence and bring the occupation to an end.

A tenancy at will does grant exclusive possession of the property to the occupier and exists where the tenancy can be determined immediately by either party at any time. It is possible to verbally agree the terms of a tenancy at will but it will only be a true tenancy at will if it can be brought to an end at any time by either party. Common situations where a tenancy at will will be implied are where a person is let into occupation pending negotiations for the grant of a new lease and pays rent (and the terms of the new lease are being negotiated) and where a person is allowed to continue in possession after the end of the lease while negotiations for a new lease take place (and those negotiations continue). If those negotiations stall however, and the occupier remains in occupation, a periodic tenancy might be implied instead, which can be more problematic.

A periodic tenancy may be created by express agreement between the parties or more commonly one arises by implication where there is a landlord and tenant relationship (where the tenant has exclusive possession) and the payment of rent. This is often the case where an owner lets someone into occupation without documenting the basis of the occupation. The period of the tenancy is determined by reference to when the rent is paid. So if rent is paid weekly, there is a weekly periodic tenancy, monthly rent is a monthly periodic tenancy and so on.

Problems of a periodic tenancy

A periodic tenancy can cause a landlord some unexpected difficulties. A landlord cannot terminate a periodic tenancy without notice so may not be able to get the property back when it wants. In addition, during the occupation, the tenant is only subject to implied terms as there are no documented terms governing the occupation. This can be frustrating where the tenant is allowed to occupy for longer than the landlord anticipated. In a yearly periodic tenancy, the courts have held that a stipulation to keep the premises in good tenantable repair during the tenancy (Richardson v Gofford (1834) 1 A&E52) and a proviso for re-entry on non-payment of rent or non-performance of covenants (Thomas v Packer (1857) 1 N & H 669) are applicable to a tenancy by implication. However, without specific, documented terms, the landlord may be unable to control use and alienation and it is unlikely that this was the landlord's intention. An owner who allows someone into a short-term occupation is unlikely to have planned to allow them to assign to anyone of their choosing.

Obtaining possession

A perhaps bigger problem faces the landlord when it wants to take the property back. A landlord cannot simply terminate the arrangement and obtain vacant possession as soon as it wants, as could be done with a licence arrangement or a tenancy at will. In the best case scenario, a landlord must serve a notice to quit expiring at the end of the relevant period (a tenant can do the same). The notice must be at least equal to the period of the tenancy and expire at the end of the relevant period. Therefore, with a monthly periodic tenancy, the landlord must give at least one month's notice, expiring on the last day of the period. However, it is not possible to contract out of a periodic tenancy the security of tenure provisions of the Landlord and Tenant Act 1954 (LTA 1954) and therefore, if the tenant is occupying the premises for the purposes of its business, it will automatically obtain the protection of the LTA 1954. In those circumstances the landlord will only be able to obtain vacant possession in one of the circumstances prescribed by the LTA 1954. This is unlikely to have been the landlord's intention when it let the tenant into occupation.

The grounds on which a landlord can oppose a new lease under the LTA 1954 are disrepair, arrears of rent, other breaches of covenant, suitable alternative accommodation, that the tenancy was created by a sub-letting, a landlord's intention to redevelop or a landlord's intention to occupy. Therefore, it can be very difficult for a landlord to get vacant possession where a periodic tenant has obtained security of tenure under the LTA 1954 and does not want to leave. Even if the landlord can prove one of the grounds, it would have to serve a section 25 notice giving the tenant between six and 12 months' notice and may need to issue proceedings if the tenant does not accept that the landlord has a valid ground of opposition. Therefore, obtaining vacant possession will take significantly longer than it would have done otherwise, if it can be obtained at all.

If the tenant has security of tenure and none of the grounds for opposing a new lease apply, the tenant is entitled to a new lease on similar terms. The terms will be determined by the court if they cannot be agreed between the parties. This at least means that the terms of the occupation can be documented in a written periodic tenancy but the landlord will not simply be able to impose any terms it wishes as the landlord may have been able to do if the terms had been documented before the tenant went into occupation, as the tenant has the advantage of being protected by the LTA 1954 and the court will look at the existing terms as the starting point. Therefore, the owner could end up with a periodic tenant with security of tenure occupying on terms that the landlord is not really happy with in terms of use, repair, alienation etc. This could have been avoided by documenting the terms of the arrangement.

Fixed term leases

It is also possible (although unusual) to create a fixed term lease orally. A lease of not more than three years which takes effect in possession at the best rent reasonably available without taking a fine (premium) can be made orally. Therefore, it is possible, if the parties have agreed to a short fixed term of occupation at the best rent reasonably available, that a lease has been created. This lease would be protected by the LTA 1954 unless the landlord had followed the contracting out procedure before the tenant went into occupation, which seems unlikely in this situation. Therefore, if the tenant is occupying the property for the purposes of his business, the landlord would not automatically get the property back at the end of the term and the issues identified above in relation to a periodic tenancy would also apply. The landlord would either have to prove one of the grounds for opposing a new lease or the tenant would be entitled to a new lease and the court would look at the terms of the existing lease in determining the new terms.

A further difficulty for landlords in this situation is that unless they have specifically agreed the terms of occupation orally, they will have very little control over the tenant's use of the property. At common law, a tenant is free to use the property for any lawful purpose, to sub-let the property or any part, and to alter it as it wishes, unless restrained by the terms of the lease. Therefore, in the absence of express terms, the tenant will be able to use the premises as it wishes, including altering the premises to suit the use and can then assign or sub-let, which is unlikely to be what the landlord intended. In addition, there is no implied term to return the property in the same condition as it was originally let. It is a duty of every tenant to use the demised premises in a tenant-like manner and a tenant must not commit voluntary waste. A tenant must also repair damage caused whether wilfully or negligently by itself but beyond that his obligation is simply to take proper care of the place. Without express terms, there is no obligation to re-instate the alterations, or to put the property back into the condition it was in at the start of the lease and to repair. In practise what this means is that the property is not going to be returned to the landlord in a condition that it can be immediately re-let and the landlord is likely to have to carry out works of repair itself and will not be able to recover the cost of those works from the tenant. A landlord is unlikely to have intended this.

Unintended consequences

The difficulty with not documenting tenancy arrangements is that there is a danger of an unintended relationship being created, with unintended consequences. The safest course of action with a short term period of occupation is either a licence to occupy or a tenancy at will because these can be brought to an end immediately if the person in occupation does anything the owner is not happy with. They can be made orally but it would still be safest to document the relationship, at the very least because both parties are then considering the nature of the relationship and what they are agreeing to, which should reduce difficulties later on. Often the problems arise because the intentions of the owner and occupier are different. If the arrangement is to be for longer than a very short period, then a lease should be entered into to document the terms of the occupation. This is the only way to ensure that the landlord has control over the way in which the property is used and the date on which it is to be returned. In particular, if an owner does not want an occupier to obtain security of tenure under the LTA 1954, it should ensure that the occupier occupies under a licence, a tenancy at will or a contracted out lease and the simplest way of ensuring this is to document the arrangement, as otherwise what one party thought of as a tenancy at will may actually be a periodic tenancy with security of tenure.

This article was first published on the Practical Law Dispute Resolution blog on 19 May 2016 and was written by Kellie Jones, an Associate in the Litigation team.